Can China, Russia Close Gas Deal?

Although Russian Prime Minister Vladimir Putin undoubtedly had numerous goals in visiting Beijing last week, his most visible mission was to make progress in the protracted negotiations concerning China’s possible purchase of an enormous volume of Russian natural gas.

For years, this issue has been a prominent agenda item at Russian-Chinese leadership summits. Expectations had been rising that an agreement might be imminent, but Putin proved unable to finalize the deal, further postponing the date when the pipeline might be built.

Chinese policy makers are eager to expand their natural gas imports. China’s surging economy has meant the country has become one of the world’s largest purchasers of natural gas and other foreign energy sources. Rapid economic growth has fuelled energy demands that outstrip China’s domestic energy supplies. And, although the government has tried to improve energy conservation and expand the use of nuclear and renewable energy sources, the Chinese will still need to import enormous quantities of oil and gas for the foreseeable future. In this regard, Beijing is seeking to diversify its foreign energy sources to limit their dependence on any single exporting country or region.

In principle, Russia should find a natural place within this framework. The Russian Federation possesses the largest natural gas reserves in the world. Many of Russia’s new and untapped gas fields are in eastern Siberia and the Russian Far East. These locations lie closer to China than the older fields that now provide gas primarily to consumers in Russia and Europe.

But despite these natural advantages, and their mutual interests in increasing bilateral energy cooperation, the Chinese and Russian governments have made only limited progress in moving beyond rosy statements of principles and vacuous memoranda of understanding to the initiation of actual energy projects. Various technical obstacles, pricing conflicts and mutual suspicions have historically kept Chinese purchases of Russian energy at relatively low levels. Frequent delays in shipments on the part of the Russians and attempts to leverage the competing interests of the Chinese, Asian, and European markets off of each other have prevented Chinese policy makers from regarding Russia as a reliable long-term supplier.

At one point in 2007, an exasperated Zhang Guobao, China’s chief energy planner and Vice Minister for National Development and Reform, complained that: ‘The Sino-Russia pipeline question is one step forward, two steps back. Today is cloudy with a chance for sun, while tomorrow is sunny with a chance for clouds. One moment Russia is saying they have made a decision, the next saying that no decision has been made.’

Perhaps the most serious impediment to large deliveries of Russian natural gas to China is the underdeveloped transportation infrastructure connecting the two countries. During most of the Cold War, the border between China and the Soviet republics was sealed and heavily militarized. In addition, the USSR’s energy pipeline network flowed from east to west since Europeans were the main foreign purchasers of the oil and gas produced in Russia, Azerbaijan, and Central Asia. It has only been in the past decade that Russian energy planners have made a comprehensive effort to send their oil and gas eastward toward the expanding markets of East Asia.

Russian energy giant Gazprom and the Chinese National Petroleum Corporation (CNPC) have been negotiating possible deals since 2004, when they established a strategic partnership agreement. During Putin’s March 2006 trip to Beijing, Gazprom and the CNPC signed a memorandum of understanding about constructing a 6,700-kilometre Altai pipeline to deliver Russian natural gas to China. The current talks envisage a 30-year contract in which Russia would supply some 68 billion cubic metres of gas annually.